Question of the Day

Whose side of the story do you believe?

There’s a lot of attention these days on how much real estate agents charge to sell houses. The House subcommittee on housing and community held a hearing a couple of weeks ago on residential brokerage services where such groups as Consumer Federation of America (CFA) and American Homeowners Grassroots Alliance bemoaned the current commission-only business of real estate agents across the country.

To hear CFA’s take on these independent contractors — real estate agents who have no job security, biweekly paycheck, benefits, vacation, sick leave or traditional company support — they are all overpaid and consumers are being fleeced by a “fixed” commission rate that’s being unfairly protected by the industry.

I know a lot of real estate agents. Some are doing very well financially. On the other hand, with the current state of the market, some are looking to get out of the business.

Most agents I know make a good living, but nothing extravagant. They draw about the regional median income but do not have the benefits that come with a full-time job. In fact, they have to pay for all their expenses — everything from paper clips to advertising and marketing.

They get to pay for all of this because they’re taking a risk in hope of making an above-average income. You won’t see many of them defending the latest commission charges these days because many markets across the country are off by as much as 30 to 40 percent. Instead, they are out looking for business. They’re trying to get sellers to price right and buyers to get off the fence. Meanwhile, their mortgage is due, their children still want to eat and they have to market clients’ properties with no guarantee of getting paid for it.

Stephen Brobeck, CFA executive director, called the current residential brokerage system “a cockamamie system that restricts competition and consumer choice” in his testimony on July 25.

Much was said in his testimony. I’ll limit this discussion to his call for the real estate industry to be regulated like a utility, a power company or gas company. He made his remarks to some pretty influential and powerful people in this country who might not really understand how a real estate agent makes his or her money.

True, agents get paid on commission. When you look at the average price of a house in the Washington market, no doubt some in Congress wag their heads at how much each agent must be walking away with from the settlement table.

Let’s work in real numbers.

Last year, the local multiple listing service reported that Washington-area real estate created roughly $44 billion in sales. The average commission, according to Real Trends, an industry watchdog group, stands at 5.1 percent — not the 6 or 7 percent Mr. Brobeck claimed in his testimony.

At that rate, with a commission split of 50/50 between brokers and their 30,000 agents, the average commission income would be roughly $37,400.

To be totally upfront — which is more than I can say for some of the testimony I read — the 80/20 rule can be applied in real estate. I would submit that it’s more like a 70/30 rule: About 70 percent of the sales are completed by 30 percent of the agents.

So you have some very successful agents on the top. The rest are digging around for the remaining commission dollars.

A lot of money changes hands in this business, and it is divided among a lot of people. So, while the dollar amounts sound expensive, they really only create an average income compared to any other industry in the region.

And here’s the catch: Agents only collect their pay if they are successful. They collect their split of the 5.1 percent commission only if the transaction actually goes through. There’s no reward for second place. If the agent gets the listing, spends her own money upfront to market it and charges all her gas to her credit card, she hopes to get paid back once the sale goes through… if the sale goes through.

The attorney gets paid even if his client goes to jail. The surgeon gets paid even if his patient dies. The real estate agent only gets paid the commission when the house sells. There’s no paycheck for failure in real estate.

M. Anthony Carr has written about real estate since 1989. He is the author of “Real Estate Investing Made Simple.” Post questions or comments at his Web log (https://commonsensereal